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COMING UNGLUED: Market Fragility and Credit Market risk indicators are now at post-Lehman levels.

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MORAL METASTASIS : Malfeasance, Manipulation & Malpractice - Metastasis is the spread of a disease from one organ or part to another non-adjacent organ or part. Cancer occurs after a single cell in a tissue is progressively genetically damaged to produce a cancer stem cell possessing a malignant phenotype. These cancer stem cells are able to undergo uncontrolled abnormal mitosis, which serves to increase the total number of cancer cells at that location. The moral fiber of our society is going through this same process as it breaks down, spreads and metastasis. We are presently in the process of Moral Metastasis that will prove fatal if not immediately operated on and surgically removed. Sadly, however it has gone undetected too long and the damage it has caused is now irreparable. MORE>>

MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS

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The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops.  This is all part of a final topping formation and a long term right shoulder technical construction pattern.  - The "Peek Inside" shows the detailed coverage available this month.

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	PART I - Understanding FINANCIAL REPRESSION
	PART II - FINANCIAL REPRESSION in Europe
	PART III - FINANCIAL REPRESSION in the US & ASIA
	PART IV - Preparations for FINANCIAL REPRESSION

Password: macro

QEIII: What is the Fed's Trigger?

Did The Market Remove Its Own QE Punchbowl? 07-29-12 Zero Hedge

As we discussed here two weeks ago, his actions in extreme monetary policy have all occurred at periods when the market's expectations of future rapid de- or dis-inflation have increased rapidly. As we noted then: without inflation break-evens dropping, the Bernanke put will not arrive; but the market in its infinitely efficient wisdom has created a self-defeating spiral of BTFD reflexive front-running on any rapid spike down in future inflation expectations - which implicitly sparks a non-dis-inflationary reaction and removes Bernanke's punchbowl for another day. This has occurred 4 times this year - with this week's early plunge being caught by Draghi and Hilsenrath - and with inflation break-evens almost at their highest in 10 months, it would appear the 'desperate-not-to-miss-the-life-giving-rally' market just removed its own blood supply.

US GROWTH: More Confirmations of Slowing Growth

The US Garbage Indicator Is Sending An Ominous Sign For The Economy 07-26-12 BI

Among the 21 categories of items shipped by rail, none have a tighter correlation to GDP than waste. According to a 2010 piece on Bloomberg, economists Michael McDonough and Carl Riccadonna note that waste has an 82 percent correlation to US economic growth. This should be pretty intuitive. The more you produce, the more you throw out.

McDonough, a Bloomberg BRIEF economist, tweeted out an update on the indicator. And frankly, it stinks. Waste carloads are way down.

CANARIES: Mounting Pressures on Central Banks to Take Action

The Stock Market Desperately Needs The Economy To Perk Up 07-24-12

Last week, Lance Roberts pointed us to a stock market chart that showed if 2012 were to repeat 2011, than stocks should collapse within days.

LPL Financial's Jeff Kleintop points at the pattern again in his weekly market commentary. But he goes one step further to show the divergence between stocks and the Citigroup Economic Surprise Index, which measures whether economic data comes in better or worse than estimates.

Lately, disappointing economic data has caused the CESI to fall, while stocks have been relatively resilient.

Here's Kleintop's comments:

For the gap between market and economic performance depicted in Figure 1 to close, either upcoming economic data must surprise to the upside or stocks need to drop sharply. It is notable that a gap similar to the current one appeared in July of 2011. Ominously, that gap closed with a sharp drop in the S&P 500, as you can see in Figure 2.

In other words, if the relationship between stocks and the CESI holds, than stock investors are going to want economic data to start surprising to the upside again soon

MOUNTING QE III PRESSURES: Perceptions Forcing Fed to Take Action - (Jon Hilsenrath Speaks)

Fed Moves Closer to Action: Central Bank Prepares Steps to Spur the Economy Unless the Recovery Picks Up 07-25-12 WSJ JON HILSENRATH

Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring. Since their June policy meeting, officials have made clear—in interviews, speeches and testimony to Congress—that they find the current state of the economy unacceptable. Many officials appear increasingly inclined to move unless they see evidence soon that activity is picking up on its own.

Fed officials could take some actions in combination or one after another.

Fed Chairman Ben Bernanke, in testimony to Congress last week, listed several options under consideration, including

1. a new program of buying mortgage-backed or Treasury securities,
2. new commitments to keep short-term interest rates near zero beyond 2014 or
3. an effort to push already-low benchmark short-term interest rates even lower.

One idea mentioned by Mr. Bernanke in his testimony would be to use a facility the Fed calls its discount window to provide cheap credit directly to banks that make new business or consumer loans. But it isn't clear such a program would do much good when banks already have ample access to cheap credit and this kind of program doesn't appear to be winning favor at the moment.

There are several reasons why Fed officials might wait for their September meeting to decide whether to proceed. By then they will have seen two more monthly unemployment reports and two more months of data on output, spending and investment. Fed officials update their economic projections at the September meeting and Mr. Bernanke holds his quarterly news conference after, which would give him an opportunity to publicly explain the Fed's thinking. Moreover, some officials believe the Fed's June decision to continue a program known as "Operation Twist" through year-end could help the economy and want to give it time to work.

• Cashin Notes Hilsenrath Is To The Fed As Greg Ip Is To The ECB 07-27-12 Zero Hedge
• Stephen Roach Smokes Crack-Addicted Market "QE3 Is Not Going To Work" 07-25-12 Zero Hedge Jon Hilzenrath is actually the chairman of the Fed. When he writes something in the Wall Street Journal, Bernanke has no choice but to deliver on what he wrote.”
• Hilsenrath Has Spoken: GDP Is Worse Than Expected After All, "Won't Constrain Fed" 07-27-12 Zero Hedge

MOUNITNG QE III PRESSURES: Perceptions Forcing Fed to Take Action

FOMC Preview: Christening QE III 07-27-12 Nothern Trust

The Federal Open Market Committee will be meeting next Tuesday and Wednesday to decide on the future course of monetary policy. Here is a matrix that looks at the pros and cons of the most likely outcomes, along the subject lines that the Committee will likely discuss.

All things considered, we think that the FOMC will opt for a modest extension of its quantitative easing program, initiating what some have called QE III. As we discussed earlier this week, we don’t think that the Fed will lower the interest rate it pays on excess reserves (IOER).

Here are the key factors we think will carry the day.

• The Fed's dual mandate calls for them to work towards maximum sustainable employment. We seem to be moving in the opposite direction of that aim. Inflation seems to be well-contained, allowing room to address the jobless issue.
• The paralysis in Congress, likely to last for the balance of this election year, does place additional pressure on the Fed to be accommodative. It might be tempting for the FOMC to throw up its collective hands in frustration, but quantitative easing has proceeded for three years now in the face of fiscal gridlock.
• Even if recent statements from Europe are followed by real action, it will take some time for European economies and banks to recover from what they have been through. The global picture will therefore remain a headwind for U.S. growth.

There will no doubt be dissent on this decision from some corners of the table. But there should be a core of support that can carry the day.

This will be a close call, so the risk of being incorrect is certainly high. I’m therefore tempted to research this even more deeply, but my family has their faces pressed angrily against the library window. Time to shut down and enjoy the scenery.

MONETARY MALPRACTICE: GLobal Wildcat Finance

Monetary Madness 07-27-12 Doug Nolan

M2

• In commemoration of M2 surpassing $10.0 TN for the first time – not to mention the unfolding confrontation between ECB President Draghi and Germany’s Bundesbank - this week’s CBB will focus on Monetary Analysis.
• It is worth noting that M2, the Fed’s narrow measure of “money” supply, surpassed $1 TN for the first time in 1975. It made it past $2 TN in 1983, $4TN in 1997, $8 TN in 2008 and $9 TN in April 2011. M2 has inflated another Trillion during the past 15 months.

MONEY

• To set the backdrop, it is worth noting that early economic thinkers were obsessed with money.
• These days, monetary analysis is little more than a footnote in contemporary economic doctrine.
• Generations ago, great minds were trying to come to grips with monetary phenomena. They came to appreciate that money and Credit had profound impacts on economies and societies, although throughout history even the most astute struggled with the complexity of it all.
• These days, “monetary stimulus” is seen as good for the markets and, yes, good again for GDP. Inflation, if it ever were to return, is not so good.
• Today’s monetary analysis is not good but it is shallow.
• Thinkers of things economic long ago appreciated that the functioning of economies was literally transformed by the introduction of money.
• An economy dominated by barter operated altogether differently after units of exchange entered the fray.
• They further understood that the introduction of bank lending – where new purchasing power and bank liabilities were created by the act of borrowing – added great complexities to how economies functioned.
• Finance mattered and it mattered a lot. Keen attention was paid to the role Credit played in economic cycles.
• For centuries, the seemingly straightforward issues of money and Credit were recognized as extraordinarily, incredibly complex.
• Analyses that various monetary fiascos and inevitable collapses came to similar conclusions: sound money and Credit were paramount.

Credit and speculative excesses were recognized as primary culprits to financial collapse and the Great Depression.

• Regrettably, incredibly important lessons learned through devastation and hardship were relegated to the dustbin of history.

WILDCAT BANKING

• Early analysis of “wildcat banking” was quite insightful. Especially as banks proliferated along with the development of the Wild West, individual banks’ bills of exchange and promissory notes garnered considerable attention. These types of bank liabilities differed greatly, based on their backing and the perceived soundness of individual institutions – depending as well on the phase of the Credit cycle. In the end, there were too many bank failures, too much worthless wildcat currency and too little confidence in these Credit instruments and institutions.
• Importantly, however, wildcat fiat “money” was initially a crucial facet of impressive wealth creation. Many a prospector borrowed from a local bank to clear land, buy seeds and invest in animals and tools. Many businesses flourished.
• Early economic thinkers, however, also recognized that unsound money would inevitably prove destabilizing and detrimental.

Monetary inflations could not be controlled. Lending volumes – along with outstanding fiat currency - would inevitably grow larger and larger, financing speculative activities and uneconomic ventures – fueling inflation and sowing the seeds of boom and bust dynamics.

• This is a common theme throughout monetary history, although monetary analysis is always burdened by the fact that every cycle has its own financial and economic nuances. The nature of the analysis is prone to historical revisionism.

GLOBAL WILDCAT FINANCE

• But I’ll conclude the shallowest analysis of monetary history - and jump right to the present. I’ve for years posited that we live in an extraordinary period of “global wildcat finance.”
• Fiat electronic Credit – much of it marketable debt instruments – has expanded unlike anything previously experienced.
• In the “developed” West, inflated real and financial assets were a primary inflationary consequence.
• In China and “developing Asia,” an unprecedented expansion of manufacturing capacity was integral to the incredible inflation of incomes and wealth.
• As for fundamental “nuances” of this monetary and economic Bubble, one can point to so-called “globalization,” the explosion of computer and communications technologies, enterprising financial innovation, deregulated Credit and speculation, and monetary policy activism.

DECOUPLED MONETARY INFLATION

• Myriad forces worked to break the traditional link between monetary excess and rapidly rising consumer prices.
• The “developing” world, enjoying access to unlimited cheap finance, built manufacturing capacity to inundate the world with manufactured goods and technology products.
• Global financial excesses allowed developed nations to indulge in cheap imports by issuing endless IOUs, while transforming economic systems from production-based to Credit-driven consumption and services.
• And the seeming New Paradigm victory over “inflation” emboldened New Age central bankers. They unwittingly nurtured an epic monetary inflation, and as this Credit Bubble has begun to buckle they have moved with extraordinary force to sustain it. Especially after the 2008 crisis response, global policymakers lost control.

EU CRISIS

• The eurozone is today locked in a disastrous monetary crisis. The marketplace simply no longer trusts the liabilities issued by some its members. Analysts continue to lambast European officials for failing to learn from our successful navigation through the 2008 crisis. This is flawed analysis.
• Europe is suffering from a late-cycle sovereign debt crisis.
• In ‘08/’09, U.S. policymakers enjoyed unprecedented demand for Treasury (and even agency) debt securities. Through the massive issuance of federal government debt along with Federal Reserve monetization, the U.S. system was able to sustain ongoing Credit growth.
• U.S. non-financial debt expanded $1.9 TN in 2008 and, despite huge mortgage write-downs, U.S. non-financial Credit still grew almost $1.1 TN in 2009. With federal debt expanding a then record $1.4 TN, total non-financial debt expanded 3.1% in 2009.

Washington was willing to jeopardize the creditworthiness of federal debt and the Fed was willing to risk its reputation - and a downward spiral was thwarted.

• A new phase of monetary inflation was commenced, this time through the massive injection of federal government and Federal Reserve finance.
• There are unappreciated costs associated with injecting such massive sums of unproductive Credit into a (maladjusted) system, which I return to below.
• Today, because they now lack creditworthiness in the marketplace, Spain and Italy no longer have the capacity to inject sufficient new Credit into their economic systems.
• This is a potentially devastating dynamic, as the lack of sufficient ongoing monetary inflation is illuminating deep structural economic impairment following years of Credit excess and attendant maladjustment.
• Earlier this week, with Spanish and Italian yields spiking higher and their markets turning illiquid, the European debt crisis was again spiraling out of control – only months after the ECB implemented its latest $1.3 TN liquidity facilities. And, once again, acute financial stress has provoked tough talk.
• ECB president Draghi Thursday morning stated, “…the ECB is ready to do whatever it takes to preserve the euro… Believe me, it will be enough.” German Finance Minister Schaeuble said he supported Draghi’s statement, while Chancellor Merkel and President Hollande came forward Friday with their own “bound by the deepest duty” to do everything to protect the euro.
• And then there was this afternoon’s unconfirmed report that Mr. Draghi is prepared to present a “game changing” multi-prong plan at next week’s European Central Bank governing council meeting that will include
  • ECB bond purchases and
  • A banking license for the ESM.

BUNDESBANK v ECB

Shifting 180 degrees from earlier in the week, rather than fearing Credit collapse the markets moved quickly in anticipation of yet another crisis-induced bout of monetary inflation. And, seemingly, only the Bundesbank remains capable of taking a measured approach. Friday morning (before afternoon reports of a Draghi’s “game changer”), from a Bundesbank spokesperson: “There haven’t been any changes in our positions on bond purchases of the Eurosystem, bond purchases by the EFSF, or giving a banking licence to the ESM… The Bundesbank has repeatedly expressed in the past that it views bond purchases critically because they blur the line between monetary and fiscal policy… The Bundesbank continues to view the SMP [securities market program] in a critical fashion. The mechanism of bond purchases is problematic because it sets the wrong incentives…

A banking license for the bailout fund would factually mean state financing via the printing press and would be a fatal route, which therefore is prohibited by the EU treaty.”

No doubt about it, the Bundesbank is increasingly isolated. They are at odds with most European politicians and they are at odds with other central bankers. They are clearly not on the same page with Mr. Draghi. And no group of government officials anywhere more clearly appreciates myriad risks associated with monetary inflations. The German/“Austrian” view of economics just has a very different perspective, and it goes way beyond some fixation on Weimar hyperinflation.

The focus is on how real wealth is created and how wealth is destroyed.

Monetary Inflations are powerfully destructive.

And as a deepening European crisis applies incredible pressure on politicians throughout the region – certainly including Germany's Merkel and Schaeuble – I suspect the Bundesbank will hold its ground. They are both right on the analysis and have the support of the German people. They understand that the German economy cannot support the massive debt of the entire eurozone.

Italian 2-year yields jumped from 3.80% on Monday morning to 5.18% by Wednesday morning. By Friday afternoon they had sunk back down to 3.6%. Spanish stocks dropped 5.8% last Friday, declined 1.1% Monday and another 3.6% on Tuesday. They gained 0.8% Wednesday, before jumping 6.1% Thursday and 3.9% Friday. Italian stocks dropped about 10% in three sessions, before rallying 10% in the next three sessions. U.S. stocks dropped 3% in three sessions and then gained 3.5% in two. German 10-year yields ended the week up 23 bps. Throughout already volatile global debt, equities, currencies and commodities markets, things have turned only more unstable.

INCREASINGLY UNSTABLE & PERILOUSLY DYSFUNCTIONAL

• And there is no doubt in my mind that ongoing monetary injections – albeit European, American, Chinese, or others – come with the cost of increasingly unstable – I would argue perilously dysfunctional - global financial markets.
• And there should be little doubt where Mr. Draghi was directing his “trust me, it will be enough” tough talk (kind of reminded me of, “go ahead, make my day”).
• The Europeans believe hedge fund and other speculator bets against their bonds, stocks and euro currency are a major contributing factor to the region’s woes.
• There wasn’t an issue back when speculators were leveraged long Europe’s (Greece’s, Spain’s, Italy’s, etc.) securities during the upside of the cycle.

RISK-ON, RISK-OFF DYNAMIC

This week demonstrated an even more powerful “risk on, risk off” dynamic. For lack of attractive alternatives, ongoing global monetary injections ensure only more “money” flows to the global leveraged speculating community. From there, the bets on red or black - either on or against policymakers’ capacity to sustain global risk market Bubbles - become bigger by the week. Draghi and European policymakers this week hit the panic button – and those with bearish hedges and bets were again forced to run for cover. Risk on wins again.

And as policymaking turns increasingly desperate, it is almost guaranteed that “risk on, risk off” turns only more unwieldy. Indeed, it is clear at this point that the more global policymakers turn to monetary inflation to thwart the downside of the Credit cycle the greater the amount of fuel injected into a dangerous global speculative Bubble. In anticipation of next week’s scheduled Federal Reserve and ECB meetings, CNBC’s Steve Liesman today referred to “Monetary Madness.” I’ll use the term to describe the past couple decades.